2008–2009 Irish banking crisis
Encyclopedia
The 2008–2011 Irish banking crisis was a crisis in the Republic of Ireland
Republic of Ireland
Ireland , described as the Republic of Ireland , is a sovereign state in Europe occupying approximately five-sixths of the island of the same name. Its capital is Dublin. Ireland, which had a population of 4.58 million in 2011, is a constitutional republic governed as a parliamentary democracy,...
which led to a number of financial institutions requiring government assistance, and subsequently led to a number of unexpected revelations about the private affairs of some banks.
In the 1995-2006 Celtic Tiger
Celtic Tiger
Celtic Tiger is a term used to describe the economy of Ireland during a period of rapid economic growth between 1995 and 2007. The expansion underwent a dramatic reversal from 2008, with GDP contracting by 14% and unemployment levels rising to 14% by 2010...
period of growth, development capital was raised in the interbank market
Interbank lending market
The interbank lending market is a market in which banks extend loans to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate...
, typically on a three-month basis, but with repayment not expected until two or three years later. Given a decline in Irish property values and the freezing-up of the world's interbank market in 2007, it was certain by the start of 2008 that the Irish banking system would have great difficulty in financing its day-to-day operations. This trading difficulty, and inadequate and/or lax supervision by the regulatory body, led to a series of government interventions, starting with a guarantee in September 2008.
The December 2008 hidden loans controversy
Anglo Irish Bank hidden loans controversy
The Anglo Irish Bank hidden loans controversy began in the Republic of Ireland in December 2008 when the chairman of Anglo Irish Bank, Ireland's third largest bank, admitted he had hidden a total of €87 million in loans from the bank, triggering a series of incidents which led to the eventual...
within Anglo Irish Bank
Anglo Irish Bank
Anglo Irish Bank was a bank based in Ireland with its headquarters in Dublin from 1964 to 2011. It went into wind-down mode after nationalisation in 2009....
led to the resignations of three executives, including chief executive Sean FitzPatrick
Sean FitzPatrick
Seán FitzPatrick was chairman of Anglo Irish Bank until he resigned in December 2008 amid mounting revelations over hidden loans...
. A mysterious "Golden Circle" of ten businessmen are being investigated over shares they purchased in Anglo Irish Bank in 2008.
Anglo Irish was nationalised
Nationalization
Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...
in January 2009 when the Irish government determined that recapitalisation would not be enough to save the bank. Since then it has emerged that Anglo Irish falsified its accounts before it was nationalised, with circular transactions between it and another bank, Permanent TSB
Irish Life and Permanent
Irish Life and Permanent, Plc or IL&P is a provider of personal financial services in Ireland. IL&P enjoys limited liability....
, being uncovered. Denis Casey, the chief executive of Irish Life and Permanent, the company that owns Permanent TSB, resigned in the aftermath of this revelation.
Recapitalisation was however carried out at Ireland's two largest banks, Allied Irish Bank (AIB) and Bank of Ireland
Bank of Ireland
The Bank of Ireland is a commercial bank operation in Ireland, which is one of the 'Big Four' in both parts of the island.Historically the premier banking organisation in Ireland, the Bank occupies a unique position in Irish banking history...
(BoI), with bailouts of €3.5 billion confirmed for each bank on 11 February 2009.
Amidst the crisis, the ruling Fianna Fáil
Fianna Fáil
Fianna Fáil – The Republican Party , more commonly known as Fianna Fáil is a centrist political party in the Republic of Ireland, founded on 23 March 1926. Fianna Fáil's name is traditionally translated into English as Soldiers of Destiny, although a more accurate rendition would be Warriors of Fál...
party fell to fourth place in an opinion poll conducted by The Irish Times
The Irish Times
The Irish Times is an Irish daily broadsheet newspaper launched on 29 March 1859. The editor is Kevin O'Sullivan who succeeded Geraldine Kennedy in 2011; the deputy editor is Paul O'Neill. The Irish Times is considered to be Ireland's newspaper of record, and is published every day except Sundays...
, placing behind Fine Gael
Fine Gael
Fine Gael is a centre-right to centrist political party in the Republic of Ireland. It is the single largest party in Ireland in the Oireachtas, in local government, and in terms of Members of the European Parliament. The party has a membership of over 35,000...
, Labour
Labour Party (Ireland)
The Labour Party is a social-democratic political party in the Republic of Ireland. The Labour Party was founded in 1912 in Clonmel, County Tipperary, by James Connolly, James Larkin and William X. O'Brien as the political wing of the Irish Trade Union Congress. Unlike the other main Irish...
and Sinn Féin
Sinn Féin
Sinn Féin is a left wing, Irish republican political party in Ireland. The name is Irish for "ourselves" or "we ourselves", although it is frequently mistranslated as "ourselves alone". Originating in the Sinn Féin organisation founded in 1905 by Arthur Griffith, it took its current form in 1970...
, putting Labour and SF ahead of Fianna Fáil for the first time in Irish history. Fine Gael leader and current Taoiseach Enda Kenny
Enda Kenny
Enda Kenny is an Irish Fine Gael politician, and has been the Taoiseach since 2011. He has led Fine Gael since 2002. He served as Minister for Tourism and Trade from 1994 to 1997. He is also a two-term Vice President of the European People's Party.Kenny has been a Teachta Dála for Mayo since...
, speaking in County Cork
County Cork
County Cork is a county in Ireland. It is located in the South-West Region and is also part of the province of Munster. It is named after the city of Cork . Cork County Council is the local authority for the county...
on 15 February 2009, asked the entire board of the Central Bank of Ireland's Financial Regulation section to resign.
In March 2011, Central Bank Governor, Patrick Honohan
Patrick Honohan
Patrick Honohan is an economist who was appointed Governor of the Central Bank of Ireland in September 2009. Among his main tasks are the challenge of helping to resolve the 2008–2010 Irish banking crisis. He is married with one son.-Education:Honohan graduated with a B.A...
described the crisis as "one of the most expensive banking crises in world history". In September 2011 he said that the banks were now financially sound
Background
Resignation of the Financial Regulator
Following reports of a communication breakdown at the office of the Financial Services Regulatory Authority, the Financial Regulator Patrick Neary on 9 January 2009 announced his decision to retire as of 31 January that year. Neary's perceived weakness in dealing with Anglo Irish BankAnglo Irish Bank
Anglo Irish Bank was a bank based in Ireland with its headquarters in Dublin from 1964 to 2011. It went into wind-down mode after nationalisation in 2009....
received heavy criticism, with Green Party
Green Party (Ireland)
The Green Party is a green political party in Ireland. It was founded as the Ecology Party of Ireland in 1981 by Dublin teacher Christopher Fettes. The party became the Green Alliance in 1983 and in 1987 was renamed to its current title in English...
Senator Dan Boyle
Dan Boyle (politician)
Dan Boyle is an Irish Green Party politician and party chairperson. He was a Teachta Dála for Cork South Central from 2002–07 and was a member of Seanad Éireann from 2007–11.-Early life and education:...
calling for a strengthening of powers within the organisation and saying that confidence in Irish financial services had been eroded by events of the previous six months. Financial observers indicated that a replacement for Neary might have to be sought in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
or United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. Following the announcement, reports emerged which indicated that the Financial Regulator may have known of the Anglo loans for eight years prior to their revelation.
Nationalisation
Emergency legislation to nationalise Anglo Irish bank was voted through Dáil ÉireannDáil Éireann
Dáil Éireann is the lower house, but principal chamber, of the Oireachtas , which also includes the President of Ireland and Seanad Éireann . It is directly elected at least once in every five years under the system of proportional representation by means of the single transferable vote...
and passed through Seanad Éireann
Seanad Éireann
Seanad Éireann is the upper house of the Oireachtas , which also comprises the President of Ireland and Dáil Éireann . It is commonly called the Seanad or Senate and its members Senators or Seanadóirí . Unlike Dáil Éireann, it is not directly elected but consists of a mixture of members chosen by...
without a vote on 20 January 2009. President
President of Ireland
The President of Ireland is the head of state of Ireland. The President is usually directly elected by the people for seven years, and can be elected for a maximum of two terms. The presidency is largely a ceremonial office, but the President does exercise certain limited powers with absolute...
Mary McAleese
Mary McAleese
Mary Patricia McAleese served as the eighth President of Ireland from 1997 to 2011. She was the second female president and was first elected in 1997 succeeding Mary Robinson, making McAleese the world's first woman to succeed another as president. She was re-elected unopposed for a second term in...
then signed the bill at Áras an Uachtaráin
Áras an Uachtaráin
Áras an Uachtaráin , formerly the Viceregal Lodge, is the official residence of the President of Ireland. It is located in the Phoenix Park on the northside of Dublin.-Origins:...
the following day, confirming the bank's nationalisation.
Irish Life and Permanent interference
Following a revelation that Government appointed directors in Anglo Irish Bank and the Financial Regulator were investigating a deposit of billions of euro into the institution, Irish Life and Permanent admitted on 10 February 2009 that it had provided what it called "exceptional support" to Anglo during September 2008. Irish Life and Permanent confirmed it had made the deposit following the introduction of the Government Guarantee Scheme, which was set up to provide each bank under its jurisdiction with a limited supply of credit in the event of a collapse. However this volatility in deposits in Anglo Irish Bank has been stated as one of the reasons why the Government moved to nationalise it. The Financial Regulator has stated that the transactions which took place between the two banks are "unacceptable" and the chief executive of Irish Life and Permanent, Denis Casey, has resigned his position. However, in a press release dated 13 February 2009, the Financial Regulator revealed that "it encouraged Irish banks to work together where necessary so as to continue to use normal inter-bank funding arrangements for liquidity purposes."Irish Nationwide involvement
On the evening of 17 February 2009, the Chairman of the building society Irish NationwideIrish Nationwide
Irish Nationwide Building Society was a financial institution in Ireland from 1873 to 2011. One of the country's oldest financial institutions, it was originally called the Irish Industrial Building Society; it changed its name in 1975 when it had just five staff...
, Dr Michael Walsh, resigned his position.
Warning signs ignored and suppressed
The crisis began through a failure by banks, the government, news organizations and the corporate sector to heed signs that the economy was overheating. In June 2005 The EconomistThe Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
mentioned Ireland on a list of countries with recent property price inflation; Ireland's price inflation of 192% in 1997-2005 was the highest on its list. In December 2005 Professor Brian Lucey felt that prices would continue at a "modest but still significant pace".
Morgan Kelly, a professor of economics at University College Dublin
University College Dublin
University College Dublin ) - formally known as University College Dublin - National University of Ireland, Dublin is the Republic of Ireland's largest, and Ireland's second largest, university, with over 1,300 faculty and 17,000 students...
, was particularly concerned about the real estate bubble which was reaching its climax in the summer of 2006. He noted that a fifth of Irish workers were in the construction industry and that the average price of a home in Dublin had increased 500% from 1994 to 2006. He published a news article in the Irish Times, asserting that Irish real estate prices could possibly fall 40 - 50%. His second article was rejected by the Irish Independent
Irish Independent
The Irish Independent is Ireland's largest-selling daily newspaper that is published in both compact and broadsheet formats. It is the flagship publication of Independent News & Media.-History:...
and lingered unpublished at The Sunday Business Post
The Sunday Business Post
The Sunday Business Post is an Irish national Sunday newspaper published by Post Publications Limited. Post Publications is owned by Thomas Crosbie Holdings. According to the Audit Bureau of Circulations, Ireland, the average weekly circulation was 57,783 for the period January to June 2009. The...
until the Irish Times agreed to run it in September 2007. Kelly predicted the collapse of Irish banks, which had fuelled the rapid rise of real estate by increasingly lowering their lending standards and relying more on 3-month interbank loans than on their deposit base..
Kelly's prognostications caused a minor controversy but mostly went unnoticed until March 2008, when Philip Ingram, an analyst at Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
, wrote a scathing report about the real estate bubble, focusing on the three major Irish banks most responsible for the crisis, Anglo Irish, Bank of Ireland
Bank of Ireland
The Bank of Ireland is a commercial bank operation in Ireland, which is one of the 'Big Four' in both parts of the island.Historically the premier banking organisation in Ireland, the Bank occupies a unique position in Irish banking history...
, and AIB
AIB
AIB may refer to:* add-in board * Admiralty Interview Board* AIB College of Business* Allied Intelligence Bureau* 2-Aminoisobutyric acid* Amplified in breast* The Art Institute of Boston* The Arts Institute at Bournemouth...
. Merrill Lynch had major, lucrative underwriting relationships with those banks, and a senior executive at Anglo Irish, Matt Moran, who had registered displeasure with Kelly over his articles, among others, did the same to Merrill. Merrill in turn retracted the report within hours, and fired Ingram by yearend.
From May 2007 the banks' share prices on the Irish stock market
ISEQ 20
The ISEQ 20 is a benchmark stock market index composed of companies that trade on the Irish Stock Exchange. The index comprises the 20 companies with the highest trading volume and market capitalization contained within the ISEQ Overall Index. The index was started on 31 December 2004 at a base of...
declined markedly, and they had halved by May 2008. This had an inevitable effect on their capital adequacy ratio
Capital adequacy ratio
Capital adequacy ratio , also called Capital to Risk Assets Ratio , is a ratio of a bank's capital to its risk...
s and therefore their ability to lend ever-higher amounts that were necessary to support property prices. In April 2008 Professor Cormac Ó Gráda
Cormac Ó Gráda
Cormac Ó Gráda is an Irish economist, a professor of economics at University College Dublin, and a prolific author of books and academic papers....
noted that: "property prices [are] suffering a meltdown likely to last for some years", yet the bulk of new bank lending since 2000 was based on mortages
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
secured on property.
On 7 May 2008 Brian Lenihan, Jnr
Brian Lenihan, Jnr
Brian Joseph Lenihan was an Irish Fianna Fáil politician and barrister who served in the government of Ireland as Minister for Justice, Equality and Law Reform from 2007 to 2008 and as Minister for Finance from 2008 to 2011...
was appointed Minister for Finance
Minister for Finance (Ireland)
The Minister for Finance is the title held by the Irish government minister responsible for all financial and monetary matters. The office-holder controls the Department of Finance and is considered one of the most important members of the Government of Ireland.The current Minister for Finance is...
. Formerly a gifted lawyer and minister, he had no experience of finance, and opponents deplored that he would have to "learn on the job". On 14 May 2008 he remarked that: ".. the risks that we identified in the last Budget have materialised, risks such as recent developments in the international financial markets, further appreciation of the euro against the dollar and sterling, lower international growth and domestically a sharper slowdown in housing". Ignoring the property bubble, he concluded that: ".. we are well placed to absorb the housing adjustments and external ‘shocks’ so that our medium-term prospects will continue to be favourable. Our public finances are sound, with one of the lowest levels of debt in the euro area. Our markets are flexible allowing us to respond efficiently to adverse developments. We have a dynamic and well-educated labour force. We have a pro-business outward looking society. The tax burden on both labour and capital is low. Not many countries anywhere in the world are facing the present global economic difficulties with such advantages."
Recapitalisations of AIB and Bank of Ireland
Having guaranteed the six main Irish banks in September 2008, Minister for Finance, Brian LenihanBrian Lenihan, Jnr
Brian Joseph Lenihan was an Irish Fianna Fáil politician and barrister who served in the government of Ireland as Minister for Justice, Equality and Law Reform from 2007 to 2008 and as Minister for Finance from 2008 to 2011...
announced on 21 December 2008 that he would seek to recapitalise Ireland's three main banks, Allied Irish Bank (AIB), Bank of Ireland
Bank of Ireland
The Bank of Ireland is a commercial bank operation in Ireland, which is one of the 'Big Four' in both parts of the island.Historically the premier banking organisation in Ireland, the Bank occupies a unique position in Irish banking history...
(BoI) and Anglo Irish Bank
Anglo Irish Bank
Anglo Irish Bank was a bank based in Ireland with its headquarters in Dublin from 1964 to 2011. It went into wind-down mode after nationalisation in 2009....
. Under the plan the Government would take €2 billion in preference shares in each of Bank of Ireland and Allied Irish Bank and €1.5 billion in preference shares in Anglo Irish Bank, giving it a 75% control of the latter.
On 11 February 2009, he announced the provision of two €3.5 billion bailouts to AIB and BoI as part of his government's recapitalisation scheme. The plan will also see the Minister appoint 25% of the directors at each bank, whilst the banks have agreed to provide a 30% increase in mortgages for first time buyers and a 10% increase in loans to small and medium businesses as well as to hold-off on repossessions of mortgage holders for twelve months after they fall into arrears. The salaries of senior bank executives will be frozen and they will not receive performance bonuses. Richard Bruton
Richard Bruton
Richard Bruton is an Irish Fine Gael politician and has been a Teachta Dála for the Dublin North Central constituency since 1982. He was appointed as Minister for Jobs, Enterprise and Innovation on 9 March 2011...
of the opposition's Fine Gael responded by calling the recapitalisation plan a "€7 billion gamble on the wrong horse".
Bank of Ireland chief executive Brian Goggin
Brian Goggin
Brian Goggin is the former Chief Executive Officer of the Bank of Ireland, Ireland's second largest bank. He took over from Michael Soden in June 2004....
announced his retirement in January 2009, confessing to RTÉ that his bank has made bad lending decisions. Asked about his expected salary for 2009, Goggin admitted that it would be “less than €2 million”. Goggin had earned approximately €3 million in the year to 31 March 2008. He was replaced as CEO by Richie Boucher
Richie Boucher
Richie Boucher, aged 51 , is the current Chief Executive Officer of the Bank of Ireland, Ireland's largest bank. He took over from Brian Goggin on 25 February 2009 who resigned following the injection of Irish Government funds and the guarantee of deposits.-Career and Education:Richie Boucher was...
whose appointment was announced on 25 February.
EU-IMF "bailout" of November 2010
In September 2010 government support for the six guaranteed banks had risen markedly to 32% of GDP, and this started to raise the yields of government bonds. Fatally, later that month the government decided to renew the annual guarantee covering the six main banks. By October yields were above 7%, causing concern that the deficit was now unsustainable. In November 2010 the government had to seek a €85 billion "bailout" from the ECBEuropean Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
and the IMF
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
on onerous terms. Deserted by its coalition partner, the government lost the Irish general election, 2011.
By August 2011 total funding for the six banks by the ECB and the Irish Central Bank came to about €150 billion; the largest of the six, Bank of Ireland, then had a market capitalisation of just €2.86 billion.
External links
- Irish Government's recapitalisation plan
- Brian Lenihan explains his recapitalisation plan
- Statement on transactions with Anglo Irish Bank by Irish Life and PermanentIrish Life and PermanentIrish Life and Permanent, Plc or IL&P is a provider of personal financial services in Ireland. IL&P enjoys limited liability....
- Statement on Irish Life and Permanent transactions by the Financial Regulator
- BoI CEO Brian Goggin tells Christopher McKevitt of his expected reduction in wages